Forty-one years ago, on May 10, 1981, Socialist leader Francois Mitterrand surprised the world by being elected President of France, and taking  the country sharply left. His policies, quickly implemented, included: nationalization of the country’s major banks and companies, lowering the retirement age to 60, guaranteeing five weeks of holidays a year, reenforcing union power in collective bargaining and even including four Communist ministers in his government. His pledge to never devalue the franc was quickly broken and two years later, he was forced to back pedal from some of his more radical policies.

Today, Emmanuel Macron, aged 39 when he was elected in in 2017, was re-elected to a second five-year term on April 24 with 58.6% of votes against 41.5% for Marine Le Pen, leader of the National Rally, the latest incarnation of the far-right Front National party. But only 65% of France’s 48.7 m registered voters cast valid votes – the smallest turnout since the 1950s. Le Pen’s party continued a rising trend, winning the largest number of votes in its 50-year history.

Macron now faces legislative elections on June 12 and 19 in which La Republique en Marche, the party he created in 2017 and now renamed Renaissance, must renew its majority in the National Assembly if he is to continue his reforms of business and labor relations, taxation, and a chaotic pension system. But a renewed Renaissance majority is not a foregone conclusion.

France’s two principal political parties, the Gaullists and the Socialists which governed since WW II, have been hollowed out over the past two decades as the parties failed to react to major social and economic changes. Les Republicans, the Gaullists’ latest incarnation, won only 4.7% in the first round of the presidential election; and the Socialists a more miserable 1.75%. Even more concerning was that the extreme right and left parties and movements won a combined 60% of the first-round vote.

If backed by his own majority in the National Assembly  the French president has substantial powers such as naming a new PM when he wishes, calling early legislative elections, and legislating by decree for a limited time.

But this legislative election campaign has been marked by consolidation by the left and right parties and groupings. Current polls suggest each might gain up to a third of National Assembly, leaving the balance to Macron’s Renaissance party. Under France’s Fifth Republic constitution,  parties able to form a majority coalition in the National Assembly name their own PM irrespective of who is President. If that coalition is hostile to the President, this situation is described as “cohabitation”. This occurred in 1986 when the Gaullists won a majority and formed a government that “cohabited” with President Mitterrand for years, privatizing the nationalized banks and companies.

Le Pen’s National Rally is joining with other far right groups to present a unified slate of candidates in all 577 French voting districts. Policy objectives remain those of Le Pen during the presidential campaign: withdrawal from NATO’s military command; improved relations with Russia (a Russian bank financed her past electoral campaigns); disregard for EU law; much tougher immigration rules; and ending birth right to citizenship.

Leftwing parties  agreed on May 4 to form NUPES (pronounced NEWP), a French acronym for the New People’s Ecologist and Social Union, led by the rabble-rousing Jean-Luc Melenchon, head of the hard left of La France Insoumise – LFI (France Unbowed) who aims to be prime minister of a new leftwing government. NUPES includes his LFI, the Socialist Party, the Communist Party, and the ecologists – today’s version of the Front Populaire of French Communists and Socialists in 1936.

NUPES’ official program is a slightly softened version of Melenchon’s hard left objectives: the SMIC minimum monthly net wage would be raised from today’s € 1269 ($1,332 at today’s FX rate) to €1400 ($1,470); the retirement age cut from 62 to 60 years; tax cuts for lower incomes, higher corporate taxes, and a new constitution for what would be the VI Republic. A top NUPES priority would be abrogation of the El Khomri labor laws approved in 2016 under Socialist President Hollande, reforms that helped attract more foreign investment to France. These laws weakened union powers, reenforced collective bargaining by the company and unions representing 50% of the workforce on matters such as the 35-hour work week , overtime, in-company employee referenda, layoff benefits, and firing criteria.

NUPES vs. the EU and NATO. Melenchon insisted before the presidential election on quitting the EU, the euro and NATO; and refusing aid to Ukraine. NUPES now agrees to selectively “disobey” or “temporarily suspend” EU laws; and objects to what it calls the EU’s “liberal and productivist” philosophy on labor law. His earlier insistence on quitting NATO is not repeated.

Economic- Fiscal Issues

Demographic and productivity trends limit France’s (and the EU’s) non-inflationary potential real GDP growth to less than 2%. But substantial fiscal and monetary stimulus, Covid pandemic supply chain problems; and sharply higher energy prices pushed the French CPI up 4.5% on a March/March basis (5.1% on the EU’s harmonized index), a significantly slower rate than the EU average of 7.4%. Slow potential GDP growth means it will be difficult to rein in such inflation as the fiscal and monetary stimulus drives consumption at an inflationary rate.

French GDP was estimated to be unchanged in the 1Q22 after an 0.8% rise in the 4Q21 and 3.0% in the 3Q21. Consumption was relatively strong, but consumers are growing more pessimistic as inflation expectations worsen.

Capital spending benefited significantly from Macron’s reforms and the El Khomri labor laws. Gross capital formation rose to around 23.7% of GDP per year under Macron, up from 22% in the previous five years. Last year, 1,607 international investments were made in France, up 32 % from 2020, creating  45 008 jobs, up 30 %. The investments came from over 60 countries, especially EU countries. Germany became the No. 1 foreign investor with 300 investments, replacing the U.S. which accounted for 247, following by the UK with 151.

Fiscal policy challenges face France’s new government. Public spending in 2021 was the highest in the EU at 59.2% of GDP vs. 51.5% n Germany and a Euro zone  average of 52.4%. Relative restraint in the 2019-2021 period affected by Covid, meant French public spending rose only 10% vs. 14.5% in the Euro zone. But the public deficit was 6.5% of GDP by end-2021 vs. 3.7% in Germany. Public debt rose to 112.9% of GDP at end-2021, compared with 95.6% for the Euro zone. Macron’s pledge to reduce the deficit to 3% of GDP by 2027 seems increasingly far-fetched.

These fiscal issues and sharply high inflation mean France’s economic outlook is not encouraging even as Covid variants remain a threat. Russia’s invasion of Ukraine is boosting energy, food and other input prices and threatens Europe’s political and security equilibrium. Re-energized European unity in the face of this aggression may unravel if Russia cuts or stops gas exports to EU customers while the ECB is forced to switch from a highly stimulative to restrictive monetary policy. The risk of recession will face President Macron and France’s new government this summer.

Paul Horne – Paris
Independent International Market Economist
[email protected]